Bank performance in transition economies
AbstractThis paper examines the performance of 515 banks in 16 transition economies for the years 1994-99 based on their public financial accounts. We first examine lending behaviour and probability distribution of bank profitability to determine whether these banks exhibit behaviour and performance associated with excessive risk-taking. While we do not find evidence of excessive risk-taking on average where there is significant progress in banking and related enterprise reforms, there may be a minority of poorly capitalised banks that do take excessive risks, particularly where progress in reform is less advanced. The paper then estimates cost and revenue functions based on a model of banks as multi-product firms. The results indicate that banks' performance differs significantly depending on the multi-product firms. The results indicate that banks' performance differs significantly depending on the reform environment, as well as the competitive conditions, in which they operate. Banks with high market shares have higher costs and achieve lower margins on their loan and deposit activities. Where there has been significant progress in banking and related enterprise reforms, banks are making comfortable margins on loans and appear to be offering competitive margins on deposits, though they are still achieving overall negative returns on equity. By contrast, when substantial reforms have not been undertaken, banks have been sustaining high negative returns on loans, largely at the expense of depositors; in effect they have been able to appropriate much of the tax that inflation levies on nominal deposits, and have been using this revenue to prop up their weak loan portfolios. Overall interest margins are declining over time but are substantially higher in low-reform environments. The results indicate that an appropriate policy and regulatory framework may be a necessary condition for significant progress to be made.
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Bibliographic InfoPaper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 76.
Length: 21 pages
Date of creation: Nov 2002
Date of revision:
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banking; cost functions; revenue functions; transition;
Other versions of this item:
- Damien Neven, 2002. "Bank Performance in Transition Economies," IHEID Working Papers 07-2002, Economics Section, The Graduate Institute of International Studies.
- Steven Fries & Damien Neven & Paul Seabright, 2002. "Bank Performance in Transition Economies," William Davidson Institute Working Papers Series 505, William Davidson Institute at the University of Michigan.
- G2 - Financial Economics - - Financial Institutions and Services
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
- L8 - Industrial Organization - - Industry Studies: Services
- P2 - Economic Systems - - Socialist Systems and Transition Economies
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